Why the US dollar will be indispensible as the world's reserve currency – until it’s not

Jin Keyu, Professor, Hong Kong University of Science and Technology (centre) and Raghuram G. Rajan, Professor of Finance, University of Chicago Booth School of Business (left) were among leading economists that convened to discuss the world’s "love-hate relationship" with the US dollar at the World Economic Forum's Annual Meeting 2025 in Davos on 21 January 2025. Image: World Economic Forum / Jason Alden
- The US dollar is at a near-record high, but its future role as the world’s reserve currency continues to be questioned due to financial fragmentation and global debt concerns.
- US borrowing trends, challenges from other currencies – traditional and digital – and the burden of US dollar debt on developing countries all raise questions about ongoing dollar dominance.
- An expert panel at the World Economic Forum’s Annual Meeting 2025 in Davos expects US dollar primacy to continue for the foreseeable future, but gradual diversification could necessitate greater global collaboration in the years ahead.
The world’s "love-hate relationship" with the US dollar was the focus of leading economists at a town hall during the World Economic Forum Annual Meeting 2025. In a session called State of Play: US Dollar, the panel explored the dollar’s status as the world’s leading currency and the expectations for its future.
While many economists expect the US dollar to remain the primary reserve currency in coming years, questions persist about whether US borrowing is sustainable, how other currencies might challenge the dollar, and how resilient the dollar-based system will be in responding to economic, geopolitical and climate shocks.
The panellists also considered the challenges associated with ongoing US dollar dominance, including burdens on developing countries to manage debt and access liquidity.
The US dollar's 'exorbitant privilege'
The economists on the panel, who hailed from countries all over the world, raised questions about the US fiscal trajectory.
"Both parties in the United States seem to think that debt is a free lunch," noted Harvard economist Kenneth Rogoff, pointing out that interest payments on federal debt now surpass the entire US defense budget. Meanwhile, the dollar remains at near-record highs relative to other currencies – highs not seen since 1985 and 2002. In both previous cases, Rogoff noted that the currency fell significantly within a year or two.

The US has so far prioritized remaining the world’s leading currency and keeping its "exorbitant privilege" – economists’ term for the combination of lower borrowing costs and seigniorage benefits of nations issuing the global reserve currency.
Raghuram Rajan, former governor of India's central bank, now a professor of finance at the University of Chicago Booth School of Business, noted that this privilege depends in part on global investors’ desire to hold US assets. "If you ask: 'Where would you put your money for safe assets?' Almost surely the answer is the US," he said. Nonetheless, Rajan added: "Anything that goes on without any constraint eventually has to stop."
A new financial infrastructure?
Rather than a dramatic displacement of the US dollar, one future trajectory might involve countries’ gradual diversification through the creation of new financial ties and infrastructure. China has established around 40 bilateral currency swap lines with developing countries, pointed out economist Jin Keyu, a professor at the School of Business and Management at Hong Kong University of Science and Technology.
These efforts, she explained, are part of a long-term strategy to reduce dependence on the dollar. "China’s share of trade invoiced in renminbi has grown from 20% a decade ago to 56% today," Jin said, emphasizing the rapid pace of change. While the US Federal Reserve maintains credit swap lines with many advanced economies, the existing system often underserves developing nations, Jin explained.
"You have to be a friend of the Fed in these situations," said Rogoff, noting that the Federal Reserve has increasingly become the world’s liquidity provider in times of crisis. "The Fed's been fairly generous, but by no means is everybody a friend of the Fed."
The Fed’s increasingly dual role – as both the US central bank and de facto lender of last resort to much of the world – also poses challenges for setting monetary policy. Rajan highlighted the tensions of emerging market central bankers in responding to Fed policies.
Despite aggressive Fed rate hikes, US financial conditions remain surprisingly loose in many areas such as credit and equity markets. This leads to a paradox where emerging markets feel compelled to intervene in their own domestic markets to maintain stability. "This creates what I call 'interventions when they shouldn't'," Rajan explained, referring to the knock-on effects of Fed decisions globally. These tensions help explain some countries' growing interest not only in diversification, but also in alternative payment technologies and financial infrastructure.
While cryptocurrencies and transparent digital payments systems could present advantages for some transactions and markets, few economists see private forms of money such as Bitcoin replacing the US dollar or other state-anchored currencies in the near- or medium-term. Diversification to other currencies is not a simple matter of switching from dollars to euros or yuan, for example. It requires strengthening connections between banks and clearinghouses, and other institutional shifts that could take years, if not decades, to develop.
A gradual shift from US dollar dominance
Gradual evolution may be preferable to abrupt shifts because sudden changes in the financial architecture or geopolitical fragmentation of the financial system carry steep risks. New economic analysis from the World Economic Forum projects that extreme fragmentation of the financial system could decrease global GDP by roughly 5% – more than the setbacks caused by the 2008 financial crisis.
The challenge ahead lies less in predicting the US dollar’s ongoing dominance versus fall, but also in managing the transition to a more multipolar financial system – one that maintains global stability while better serving the developing world. The dollar may remain primary, but maintaining this lead is likely to create more constraints, shift institutional relationships and require greater collaboration.
Watch the full session ‘State of Play: US Dollar’ below:
Also watch the Special address by Donald J. Trump, President of the United States of America below:
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